Politics & Policy

A Fading Miracle

The rise and fall of German ordo-liberalism.

Miracles normally fall into the category of the supernatural. June 20, however, marks the 60th anniversary of a European economic resurrection — and that was the work of mere mortals, however inspired they may have been. But as with all man’s efforts — all the glories of this world — there were no guarantees that the miracle would endure.

In 1948, Western Europe was still emerging from the rubble of six years of war. Germany itself continued to endure rationing. Its currency was increasingly worthless. Millions relied on the black market for survival.

Germany’s economy also remained bound by the Nazis’ war-time regulations. Of course, the Allies’ failure to remove these fetters was unsurprising. Almost everyone was convinced the future belonged to highly planned economies. New Dealers, Keynesians, and Social Democrats held the levers of power.

All, that is, except one.

In early 1948, an unknown economist named Ludwig Erhard was appointed economic director for the combined British and American zones of occupied Germany. Bavarian by birth and free-market by conviction, Erhard spent the war in a business-supported research institute writing about Germany’s post-war future. Economic freedom, Erhard believed, was indispensable to Germany’s recovery. His 1948 appointment placed him in a unique position to implement his ideas.

Erhard’s revolution took place in two stages. First, with the occupiers’ support, he instituted a new currency — the Deutschemark — on June 20, 1948. The very next day, goods previously unobtainable because of lack of confidence in the old currency began appearing everywhere.

But Erhard’s second step was more difficult. The currency reform’s effects would only last, Erhard understood, if the Deutschemark reflected the real price of goods and services. This meant abolishing rationing and price-controls – a step unapproved by the occupation authorities. But on June 24th, Erhard simply went ahead and did it.

The benefits were immediate. Money acquired genuine purchasing power. People lost their fear of selling goods. Queues disappeared. Entrepreneurial incentives suddenly became real. Thus began West Germany’s remarkable tale of post-war prosperity.

There is, however, another side to this story, the consequences of which haunt Germany today. On many occasions, Erhard acknowledged his intellectual debt to a small group of German economists who, at considerable personal risk, had argued the case for economic liberty even before 1939.

Often called “neo-liberals” or “ordo-liberal,s, economists such as Wilhelm Röpke had long criticized Germany’s slide toward collectivism. This, they argued, began when the “Iron Chancellor,” Otto von Bismarck, instituted tariffs in 1878, and ended in the nightmare of Hitler’s war economy.

A passionate anti-Nazi, Röpke fled Germany in 1933. Interestingly, Röpke’s anti-Nazism included powerful critiques of the socialist aspects of the National Socialists’ program. Unlike the Nazi regime, the ordo-liberals believed in free enterprise and markets. The state’s role, they stressed, was to uphold monetary stability, the rule of law, contracts, property rights, and open markets, and to inhibit attempts by businesses to establish cartels and unions to create labor monopolies.

Unsurprisingly, these economists avidly supported Erhard’s 1948 reforms. Less well-known is that many ordo-liberals grew increasingly critical of West German economic policies after the “Great Reform,” as Röpke called it, of 1948.

As early as 1950, Röpke warned in a government-commissioned report that “a very strong trend” to overly restrict market-disciplines was already apparent. Röpke insisted that government welfare-spending — the “social” aspect of the social market — and the taxes which pay for it cannot exceed a certain level “without impairing the expansive and regulative aspects of a free market economy.”

In the decades that followed, Röpke’s critiques of West Germany’s welfare-programs grew sharper. He was deeply censorious of the Adenauer government’s 1957 decision to link state-pensions to cost-of-living changes. It was, Röpke said, a step towards the welfare-system becoming “a crutch for society.”

This “crutch” is alive and well today. In the hunt for votes before the scheduled 2009 federal election, for example, most German political parties are offering tax cuts, but simultaneously promise increased social spending. This is hardly responsible public finance. But Germany’s politicians know many Germans won’t vote for anyone openly intent on shrinking the state welfare.

Another time bomb identified by Röpke was the failure of German governments to prevent unions from establishing labor monopolies. In 1960, Röpke argued these monopolies would create wage inflexibilities that would eventually generate high unemployment. In low-unemployment 1960s West Germany, such propositions seemed alarmist. Given, however, contemporary Germany’s apparently intractable high unemployment levels, fewer today would scoff at Röpke’s predictions.

Dying in 1966, Röpke didn’t live to see his forecasts vindicated. But if any politicians are seriously interested in systematically reforming Germany’s economy, they need only read Röpke’s Economics of the Free Society. First published in 1937, this book remains a brilliant, jargon-free introduction to how markets work. Röpke understood that market economies rely on a few simple principles. There was, he often said, nothing miraculous about Germany’s post-1948 prosperity. It simply flowed from allowing basic market mechanisms to function.

For present-day Germany, the clues to its economic salvation may rest in the not-too-distant past. But is any mainstream German politician brave enough to say this? Now that may indeed require divine intervention.

– Dr. Samuel Gregg is research director at the Acton Institute and author of the forthcoming Wilhelm Röpke’s Political Economy (Edward Elgar, 2009).

Samuel Gregg is a Visiting Scholar at the Feulner Institute at The Heritage Foundation and Research Director at the Acton Institute.

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